Exxon Mobil Corporation (XOM) Strategy: Built For Decades, Not Quarters?

Published By News Desk at October 11, 2016 07:06 am

Exxon Mobil Corporation (NYSE:XOM) shares were trading higher in Monday’s session following Merrill Lynch commentary. The firm reiterated a Neutral rating on the stock and maintained a $100 price target, reflecting 15.28% upside potential over the closing price of $86.74. Strategically, the firm believes Exxon’s performance lag by the sheer virtue of outperformance through the downturn. XOM is a core holding among large index-based energy portfolios, says Merrill Lynch analyst.

Doug Leggate, Merrill Lynch analyst said: “Any view on XOM needs to recognize the strategy is built for decades, not quarters, but a pivot to short cycle investment can reset perceptions of XOM’s flexibility from an unconventional portfolio capable of greater impact on total company growth than perceived on both an absolute & per share basis.” In his view, the combination would position Exxon as a preferred name in major oil index funds compared to stocks that are believed to offer greater recovery leverage.

Mr. Leggate noted that the capital spending had dropped significantly over the last year given many significant developments. He does not expect capital expenditure to fall further in 2017 as another round of development is just around the corner and will continue till 2017. “Accordingly we believe XOM is poised for a period of higher free cash flow that in an oil recovery can see buybacks restart as the offset to a flat production outlook but with potential for a quick restart of unconventional drilling that could lift current guidance of 4.0-4.2mm boepd by >200,000boepd through 2020,” commented Mr. Leggate.

In his view, Exxon’s total oil and gas production flattens as per management’s guidance for the next four years, but with a continued shift in product mix toward liquids. He expects the company’s production mix to move to 63% in 2020, from a base of nearly 58% in 2015. Exxon has planned out over 30 major projects during the 2013-2017 plan. Mr. Leggate also anticipates the mix shift to be the catalyst for units margins growth.